Inflation cools down to nearly Zero percent level, however Index of Industrial Production (IIP) data showed the negative growth for Dec, 2008; the Advanced Tax numbers also fell by 22% and Fiscal Deficit swells to 8% of the gross domestic product.
The
Year 2008 was dreadful for the
Global Economy. It started small
in the mid of 2007 and then it
went global. This Economic
crisis which some Economists
call it as a
“Great
Depression 2.0″.
This crisis is affecting all of
us by number of ways. Hundereds
of thousands of jobs has been
lost so far and still counting.
The deteriorating US, Japan and
the Euro Zone Economy impelling
the Indian economy on
the downside. The other
developing economies are also
not immune to this global
slowdown. The world’s third
largest economy, People’s
Republic of China (PRC) is also
facing the biggest threat to its
economy in the last three
decades since the beginning of
its Economic Reform in the year
1970. China fears, their
economic growth should fall to
even below 5% from 11.4% in
2007. Global equity markets also
fell heavily due to major slump
in the financial sector. Indian
Equity markets have lost half of
its total value since Jan, 2008
peak while the other
major markets fell between 35%
and 72% and still there is no
signs of recovery in the global
financial markets as the
economic situation is continue
to worsen. The recent Macro
economic data from the United
States shows the further
deepening of Recession. Japan’s
GDP fell as much as 12% in last
quarter, the biggest drop in
more than three decades. Falling
demand for crude oil lead to
steepest fall and now trading at
4 year lowest levels.
India’s Economic Story
Developing economies like Brazil, Russia, India and China (BRIC) are emerging as an economic powerhouse. Since the year 2002, Indian Economy grew at an average rate of over 8%. The recent Financial Tsunami which led to the severe recession are also affecting the developing nations. Some of the major economic factors are now in favor of the Indian Economy. One of the vital positive changes are cooling inflation (see the picture on the left side, showing the Inflation trend), commodity prices, Crude oil prices, falling interest rates, The recent fall in Inflation figures will let the RBI to cut interest rates anytime soon. RBI will cut Repo rate between 50 bps and 1 percentage point while we’ll see the reduction in CRR somewhere up to 100 bps in the next few days. In the Year 2008, RBI had revised its key rates several times to maintain the liquidity in the banking system. The lower interest rates will allow the banks to cut their benchmark lending rates, though the deposits will also see the reduction in interest rates. Lower commodity prices and crude oil prices is driving the Inflation on a downside. Some of the bankers are now anticipating the inflation rate at 2% or even lower than that maybe by Mar, 2009. This will be wonderful as the lower inflation means, lower cost of credit, which drives the economy on the upside, however in first half of 2009 (H1-09), growth will slow significantly as Industrial production suffers from lower exports (see the given below picture showing the IIP trend in FY2008).
The
recent economic indicators
- Index of Industrial Production
(IIP) data showed the negative
growth of the economy, the
another negative point for the
Indian economy is rising fiscal
deficit. Fiscal deficit
estimated at over 8% of the
India’s annual goss domestic
product (GDP) (see our
latest Post: “Interim
Budget 2009 Review” for more
information) and 3rd
Quarter Advance Tax data which
is fell by 22% over
the corresponding year. It shows
that the profitability of the
Indian corporate is
lessening. The fact is, “we’re
now in the middle of the Global
Recession” and we’ll see some
more drastic changes in the
global economy. Besides these
factors, other important factors
are falling demand for Indian
exports and depreciating Rupee
which will widen the Current
Account deficit is another cause
of concern. India’s largest
import product is Crude Oil and
weaker domestic currency would
make imports dearer, however the
weaker currency will lead to
higher demand for India’s
exports, but as mentioned
earlier, the global recession
have a drastic impact on India
too. The recent intensifying
tensions between India and
Pakistan is the another cause of
concern, however the war is less
likely as the US, an important
ally of both nuclear armed
nations and tensions will
persist for some time, they will
eventually be defused because of
due to international interest in
the South Asian Region. From
VMW’s perspective, the
escalating tensions between the
armed nations won’t affect the
India’s growth story as this is
not a Kashmir issue. This is the
Terror issue, the global issue.
What To Watch Out For
-
Headline Inflation will continue to fall and some economies (particularly developed one) will see short period of Headline Deflation in H1 of 2009. Reason: rapidly falling inflation, asset prices, and credit crisis.
-
Central banks in across the world will continue to ease their monetary policy in the next three to six months to impede the deeper downturn and the risk deflation outcome.
-
FY09 earnings in India and 1st quarter earnings in the US and Europe. Bank’s result would be the top priority for the global investors as their positive corporate earnings might be an advance indicator for an improvment in the credit market and the whole banking system which has a lead role to damage the global economy.
In the coming three to six months, the economies are expected to continue to contract as the negative impact from the credit crisis, a further deepening of the housing slowdown, a backlash in Emerging Markets. The 1st Half of year 2009 is very crucial and by mid-2009, economies are expected to return to positive growth rates and a subsequent slow recovery will materialize during H2 next year. The US should be the first to recover followed by Asia. The positive effects from falling energy prices, monetary policy easing, and fiscal stimuli will definitely work.
The Reason For Recovery In H2 2009
- First of all, the falling Crude Oil prices from almost $150 a barrel to below $50 a barrel. Higher commodity prices were the main driver for the economic downturn last year. Food and raw material prices followed suit push the inflation on the downside. The lower inflation will act as a tax relief significantly supporting consumer purchasing power during the coming months.
- Further widespread easing of Monetary Policy. US Central Banker, Federal Reserve will implement the Zero Interest Rate Policy (ZIRP) in its Jan, 2009 meeting. European Central Bank (ECB), the central bank of Euro Zone will likely to cut aggressively. This will lead to fade in credit crisis and the economy will start to recover.
Forecast For India
VMW expects, India to grow at 6.2% in FY09 and 6.1% in FY10. On the RBI policy front, RBI should cut interest rates further to fuel the economic growth; however the robust Foreign Exchange Reserves and the strong domestic demand will protect the Indian Economy from sharp downfall.
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This is the latest version of this Research and last updated on Fri, Apr 10, 2009.